Shalom's AP Econ Blog

Absolute Advantage: who can produce more with the same resources or who can produce the same output with fewer resources Comparative Advantage: who can produce with the lowest opportunity cost Input and Output is a way to measure productivity Input vs. Output Output tons per acre, miles per gallon, words per minute, apples per tree, computers produced per hour, etc Input # of hours to do a job, # of gallons of paint to paint a house, # of acres to feed a horse Output Problem: what they give up over what they produce Input Problem: input that is dedicated to the chosen  over input that is dedicated to the forgone item 

Foreign Exchange: the buying and selling of currency Appreciation: we have a strong dollar the dollar buys more of another currency and results in less expensive imports and more expensive exports always leads to a trade deficit and imports will increase because they are cheaper  Depreciation: we have a weak dollar the dollar buys less of another currency and results in more expensive imports and less expensive exports always leads to a trade surplus and cheap exports 

Balance of Payment: Measure of money inflows and outflows between the US and the rest of the world Inflows are known as credits Outflows are known as debits The balance of payments is divided into three accounts: Current Account Capital/Financial Account Official Reserves Current Account: Balance of Trade or Net Exports: Exports - Imports; Exports are credit/assets. Imports are debits/liabilities.  Net Foreign Income or Net Investment: Income earned by US owned foreign assets; Income paid to foreign held US assets Net Transfers or Foreign Aid: Humanitarian efforts; a foreigner in the US sends money that they gross here to their home country Capital/Financial Account:  The balance of capital ownership It includes the purchases of both real and financial assets Direct investment in the US is a credit to the capital account Ex: the Toyota factory in San Antonio Direct investment by US firms/individuals in a foreign country are debits to the capi...

Balance of Trade: Goods Exports + Goods Imports Balance on Goods and Services:  (Goods Exports + Service Exports) - (Goods Imports + Service Imports) Capital Account:  Foreign Purchase of Assets + US Purchases of Assets

Disinflation: A reduction in the inflation rate from year to year; this can be seen in the LRPC. It also occurs when the aggregate demand falls (year to year) Deflation: A general decline in the price level Hyperinflation: Where an economy experiences an unusually high inflation rate Reaganomics (supply side economics): The trickle down effect-reducing taxes Stagflation: High inflation and high unemployment Supply Side Economics: Changes in AD and NOT AD in determining the level of inflation, unemployment rates, and economic growth These economists argue that lower tax rates provide positive work incentives and thus shift the aggregate supply curve right Support programs and policies that promote GDP growth by arguing that high marginal tax rates, along with the current system of transfer payments (unemployment compensation, welfare programs, etc), provide disincentives to work, invest, and to undertake entrepreneurial ventures Laffer Curve: Depicts a theoretical r...

Balance Sheet: summarizes the financial position of the bank at a certain time Assets = Liabilities How do banks create money? Banks create money by lending out deposits Fractional Reserve Banking System: the bank holds a fraction of the total money supply in reserves as currency                       Where do the loans come from? Loans come from people who make deposits.          Money Market: the market where the fed and the users of money interact thus determining the nominal interest rate. Money demand comes from households, firms, the government, and foreign sector.  Money supply is determined only by the federal reserve because the fed has a monopoly over the supply of money, and for this reason the MS curve is vertical  MS is also vertical because it is independent of the interest rate  OMO: the Fed can buy or sell bonds to the bank or the pu...

Fiscal Policy: changes in the expenditures or tax revenues of the federal government. Two Tools of Fiscal Policy Taxes - government can either increase or decrease Spending - government can increase or decrease If the government increases taxes, they must decrease spending. If the government increases spending, they must decrease taxes.  Fiscal policy is enacted to promote our national economic goals: full employment, price stability, economic growth Deficits, Surpluses, and Debt Balanced budget: revenues = expenditures Budget deficit: revenues < expenditures Budget surplus: revenues > expenditures Government debt: sum of all deficits - sum of all surpluses  Government must borrow money when it runs into a budget deficit  Individuals Corporations Financial institutions Foreign entities or foreign governments Two Options for Fiscal Policy Discretionary Fiscal Policy Expansionary Fiscal Policy - think deficit ...

The Spending Multiplier Effect  an initial change in spending (C, IG, G, XN) causes a larger change in aggregate spending, or Aggregate Demand (AD).  multiplier = change in AD/change in spending change in AD/change in C, IG, G, or XN) why this happens: expenditures and income flow continuously which sets off a sending increase in the economy the spending multiplier can be calculated from the MPC or the MPS  multiplier = 1/1-MPC or 1/MPS multipliers are positive when there is an increase in spending and negative when there is a decrease The Tax Multiplier  when the government taxes, the multiplier works in reverse because now money is leaving the circular flow the tax multiplier is always negative  -MPC/1-MPC or MPC/MPS if there is a tax cut, then the multiplier is positive because there is now more money in the circular flow

Disposable Income: income after taxes or net income With disposable income, households can either - Consume (spend money on goods and services) - Save (not spend money on goods and services) Consumption Household spending The ability to consume is constrained by (the amount of disposable income, the propensity to save)  Do households consume of DI = 0? Yes. (autonomous consumption, dissaving) Saving Household is not spending The ability to save is constrained by (the amount of disposable income, the propensity to consume) Do households save DI = 0? No.  Formulas:  APC = Average Propensity to Consume, APS = Average Propensity to Save MPC = Marginal Propensity to Consume APC + APS = 1 1 - APC = APS 1 - APS = APC APC > 1 = Dissaving -APS = Dissaving MPC + MPS = 1 MPC = 1 - MPS MPS = 1 - MPC  MPC = change in consumption/change in DI (% of every extra dollar earned that is spent) the fraction of any change ...

Investment: Money spend or expenditures on things like new plants (factories), capital equipment (machinery), technology (hardware + software), new homes, and inventories (goods sold by producers) Expected Rates of Return How do businesses make investment decisions?  - Cost / Benefit Analysis How does business determine the benefits?  - The expected rate of return How does business count the cost?  - Interest costs How does business determine the amount of investment they undertake?  - Compare the expected rate of return to interest cost - If expected return > interest cost. then invest - If expected return < interest cost, then do not Real vs. Nominal Interest Rate What's the difference?  - Nominal is the observable rate of interest while real subtracts out inflation (π%) and is only known x post facto. Formula: r% = i% - π% What determines the cost of an investment decision? - The real interest rate (r%) ...

The equilibrium of AS and AD determines current output (GDPR) and the price level (PL) Full Employment:  occurs where AD intersects SRAS and LRAS at the same time. Recessionary Gap: exists when equilibrium is below full employment output Inflationary Gap: exists when equilibrium is beyond full employment output Changes in AD (u = employment, 𝛑 = inflation) Consumption  Gross Private Investment Government Spending Net Exports Changes in SRAS:  Input prices Productivity  Legal Institutional Environment 

Aggregate Supply: The level of real GDP (GDPR)  that firms will produce at each price level (PL) Long Run v. Short Run Long Run period of time where input prices are completely flexible and adjust to changes in the price level, always vertical the level of real GDP supplied is independent of the price level the Long-Run Aggregate Supply (LRAS) marks the level of full employment in the economy (analogous to PPC)  vertical Short Run period of time where input prices are sticky and do not adjust to changes in the price level the level of real GDP supplies is directly related to the price level because input prices are sticky in the short-run, the Short-Run Aggregate Supply (SRAS) is upward sloping upward sloping  Changes in SRAS  an increase in SRAS is seen as a shift to the right a decrease is seen as a shift to the left the key to understanding shifts in SRAS is per unit cost of production per-unit production cost = tot...

Aggregate Demand (AD): shows the amount of real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level; the demand by consumers, businesses, government, and foreign countries the inverse relationship between price level and real GDP level AD = C + I + G + Xn Curve X Axis: real domestic output Curve Y Axis: price level Changes in price level cause a move along the curve not a shift of the curve 3 Reasons Why AD is Downward Sloping:  1. The Wealth Effect Higher prices reduce the purchasing power of $ This decreases the quantity of expenditures Lower price levels increase purchasing power and increase expenditures Ex: If the balance in your bank was $50,000 but inflation erodes your purchasing power, you will be likely to reduce your spending Price level goes up, GDP demanded goes down 2. The Interest-Rate Effect  As price level increases, lenders need to charge higher int...

Unemployment:  failure to use available resources, particularly labor, to produce desired goods and services.  Population: the number of people in a country Labor Force: number of people in a country that are classified as employed or unemployed Employed: people who are 16 years of age or older who have a job; must work at least hour every two weeks; does not matter if it is full time or part-time Unemployed: people who are 16 years of age or older who do not have a job but they have actively searched for a job in the last two weeks Not in the Labor Force:  kids full-time students retirees the disabled the mentally institutionalized  the incarcerated the military  homemakers discouraged workers How to Calculate Unemployment Rate:  (number of unemployed/number of unemployed + number of employed) x 100 4 Types of Unemployment Frictional Unemployment: people are temporarily unemployed or in between jobs; these indiv...

Inflation: reduces the purchasing power of money Gas 1982: $0.60, Gas 2018: $2.75 when inflation occurs, each dollar of income will buy fewer goods than before 3 Causes of Inflation:  the government prints too much money; governments that keep printing money to pay debts end up with a condition called hyperinflation Demand-pull inflation: too many dollars chasing too few goods; demand pulls up prices Cost-push inflation: higher production cost increases prices Unanticipated inflation:  Hurt by Inflation:  Lendors/Predators - locked into a fixed interest rate People on a fixed income  Savers COLA = Cost of Living Adjustment  Helped by Inflation:  Debtors/Borrowers Flexible Income A business where the price of the product increases faster than the price of resources  Nominal Interest Rate: the unadjusted cost of borrowing or lending money Real Interest Rate: the cost of borrowing or lending money that is ...

GDP (Gross Domestic Product): the total market value of all final goods and services produced within a country's borders within a given year. i.e an American working within the US is on the US' GDP formula: GDP = C + Ig + G + Xn (expenditure approach) C: personal consumption expenditure - finished durable and non-durable goods (67% of the economy)  Ig: gross private domestic investment - new factory equipment, factory equipment maintenance, construction of housing, unsold inventory of products built in a year ( net private domestic investment + depreciation) G: government spending  Xn: net exports -  (Exports - Imports) Not Included in GDP:  used or secondhand goods (in an effort to avoid double counting) gifts; transfer payments: no output is produced, recipients contribute nothing to current production (public: welfare, social security; private: scholarships) stocks and bonds (purely financial transactions) unreported busin...

Household: a person or a group of people who share an income. sell resources buy products Firm: an organization that produces goods and services for sale. they buy resources and sell products Factor (Resource) Market: the market in which the factors of production are bought by firms and sold by households. firms buy, households sell Product Market: where goods and services are bought and sold. firms sell, households buy Factor Payments Land - Rents Labor - Wages Capital - Interests Entrepreneurship - Profits

Price Ceiling: A legal max price meant to help buyers; it keeps the price from getting too high Lower prices for some consumers Shortage Long lines for buyers Illegal sales above the equilibrium price Price Floor: The legal minimum price that is meant to help the seller; it keeps product prices from falling Higher product prices Surplus Higher taxes Waste Business Cycle: the fluctuation in economic activity that an economy experiences over a period of time GDP (Gross Domestic Product) measures a country's standard of living An average business cycle is 5 to 7 years Expansion: a period where you experience high/real GDP and high employment Peak: the highest point just before the unemployment rate rises  Contraction/Recession: real GDP decreases and unemployment is high; lasts about 14 months; if a recession loses more than 10% of real GDP, then it's a depression. Trough/Depression: lowest point; troughs are meaningless because we never ...

Shalom Akinwunmi AP Economics 3rd Period Supply: the quantities that producers or sellers are willing and able to produce or sell at various prices The Law of Supply: There is a direct relationship between price and quantity supply What Causes a Change in the Quantity of Supply? Δ in price What Causes a Change in Supply? Δ In the number of sellers (producers/suppliers) In the cost of production (resource prices) In technology In the weather In taxes and subsidies In expectations Total revenue formula: Price x Quantity Fixed cost: a cost that does not change no matter how much of a good is being produced Variable cost: a cost that rises and falls depending upon how much is produced Marginal cost: the cost of producing one more additional unit of a good Marginal Revenue: New total revenue - old marginal revenue Important Formulas (Q: Quantity; TC: Total Cost; TFC: Total Fixed Cost; TVC: Total Variable Cost; MC: Marginal Cost; AFC: A...